By Andy Home
LONDON, Oct 7 (Reuters) - You don't need to look very far tounderstand why nickel has been the consistentunderperformer of the London Metal Exchange (LME) base metalspack since the middle of the year.
The explanation comes on a daily basis in the form of theLME's morning stocks report.
Today's showed registered inventory rising bya net 558 tonnes to 240,408 tonnes, an all-time record high -the latest in a long series of them - as surplus units spillinto exchange warehouses.
Nickel is a market in chronic oversupply resulting fromsystemic over-production.
Supply needs to be cut if the market is to rebalance. Butthis market's supply profile is complex, with at least threemoving parts.
The first is China's nickel pig iron (NPI) sector. There arestill few signs that the expansion momentum in NPI is slowing.Rather, price pressures are forcing producers to switch tolower-cost technology, in effect reducing the collective costcurve.
That's put pressure on existing higher-cost producers in therest of the world.
There has been some supply-side response but up to now ithas been patchy. A few Australian mines have been shuttered.Glencore Xstrata has mothballed its ferronickeloperations in the Dominican Republic, while Votorantim has done the same at its Fortaleza plant in Brazil.
Then there is the third wild card, the new projectscurrently ramping up with the sort of bad timing that commoditymarkets used to be famous for.
HPAL - TWO STEPS FORWARD...
This third supply element is itself highly unpredictable,largely because four of these projects are working withhigh-pressure-acid-leach (HPAL) technology, which has a highlyproblematic track record.
And the operational challenges were again evident in thelatest batch of quarterly production reports, with twodowngrades to production guidance.
In the case of the Ambatovy project in Madagascar, this wasthe second consecutive downgrade.
Ambatovy, with nameplate capacity of 60,000 tonnes per yearfinished metal, was originally expected to produce 35,000 tonnesin its first full year of operation.
That figure was cut to 31,000 tonnes at the half-year stageand has just been cut again to 26,000 tonnes.
Sherritt International, majority owner and operator,said that ore throughput in the third quarter declined to 39percent of nameplate capacity from 41 percent in the secondquarter.
The core problem was "planned and unplanned maintenanceactivities" with the refining plant, "including acid injectionsystem failures on Autoclaves 2 and 3 that caused externaldamage to the shell of the autoclaves".
Production guidance at the Ramu project in Papua New Guineahas also just been cut.
Highlands Pacific, a minority shareholder in Ramu,said in its Q3 report that the Chinese operator "has advisedthat they will not reach the targeted production of 15,500tonnes of nickel (50 percent of nameplate capacity) for the 2013year".
No new figure was provided but production through Septemberwas just 7,665 tonnes of nickel in hydroxide.
The Goro project in New Caledonia, or VNC as it has now beennamed by owner-operator Vale, is now in its thirdyear of operation and has come to define the challenges involvedin getting consistent performance out of HPAL.
Vale has just announced that September production of 2,200tonnes of nickel in hydroxide and oxide was the "best monthever".
But quarterly production of 5,653 tonnes was only marginallybetter than Q2's output of 3,400 tonnes, while finished productsoutput, once the intermediate products have been further refinedby the company's plants in Taiwan and South Korea, fell to 4,700tonnes from 6,600 tonnes.
Only First Quantum appears to have cracked thetechnology. Its Ravensthorpe operation in Australia produced arecord 7,560 tonnes in mixed hydroxide in Q3 with 2013 guidanceof 35,000-37,000 tonnes held unchanged.
NO TURNING BACK
Now, these continued operating problems and productiondowngrades might be viewed as a positive, given the evidentoversupply in the nickel market.
But none of these HPAL operators is going to give up. Indeedthe Q3 reports amounted to a collective statement of intent tocontinue working towards full capacity.
"The ramp-up of VNC showed significant advances, which makeus confident of achieving performance targets for next year,when we expect to close the gap in cash flow generation," saidVale.
Sherritt said it is aiming for commercial production atAmbatovy, defined as consistent throughput of ore at 70 percentof design capacity over a 30-day period, in the fourth quarterof this year.
Ramu's operator, meanwhile, remains confident that theproject will reach "full production capacity by the end of2014".
Between them, these three projects are intended to deliver150,000 tonnes of contained nickel per year. Cumulativeproduction in the first nine months of this year was just 40,400tonnes.
That means there is a lot more metal to come, if theoperators' confidence is to be believed.
There is also a lot of more metal to come from two otherprojects that are in the process of ramping up.
Glencore Xstrata has started commissioning its 60,000-tonneper year Koniambo ferronickel project in New Caledonia, whileVale's 52,000-tonne per year Onca Puma ferronickel operationsare expected to start producing again this quarter after ayear's inactivity following a furnace blow-out.
The key point with all these projects is that operators needto keep pushing for full-capacity production to start recoupingthe massive capital costs.
There may well be more technical set-backs at the HPALprojects, given the evident challenges in achieving consistentoperational performance, but the simple fact is that there aresome 260,000 tonnes of capacity ramping up with incrementalflow-through to a market already burdened with large andstill-rising stocks.
The only real question is one of timing.
And the only real solution for this market, if it is torebalance supply and demand, is the implementation of more anddeeper voluntary curtailments.
Until that happens, today's fresh record high in LME stockswon't be the last.